Engr 111 Midterm Exam Winter 09_Version B_SOLUTIONS

Engr 111 Midterm Exam Winter 09_Version B_SOLUTIONS - UCLA...

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1 UCLA Finance for Engineers and Scientists E111 Midterm Exam Winter 2009 Prof. Bristow Version B Solutions
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2 Q1.(3 pts) Write the DuPont formula (identity) and state three things that the DuPont formula tells you for a given firm? Dupont formula: ROS x TO x LEV = ROE 1. operating efficiency: measured by profit margin—how much profit it takes per dollar of sales. 2. asset use efficiency: measured by the total asset turnover—how much sales are generated per dollar of assets. 3. financial leverage: measured by equity multiplier—how many assets can be supported by each dollar of equity. Q2.(3 pts) In two or three sentences state what are agency problems, and why do they exist within a corporation? How can they be reduced? Agency problems are caused by a misalignment of interests between principals and agents. Agency problems exit when agents (financial managers) and principals (shareholders) do not share the same interest for the company. They can be reduced if the principals design compensation and contracts for agents to align their interests, such as stock options or profit sharing plans. The threat of a takeover of the company helps minimize agent costs as well. Q3.(3 pts) In one or two sentences define the difference between a primary market and a secondary market? Primary market—securities are initially sold from the firm (or their investment bank) to the public, such as IPO. Secondary market—one where trades occur between investors. Q4.(4 pts) The 2008 COGS (cost of goods sold) are $10 million and revenues are $50 million and $2 million is the 12/31/2008 inventory. Based on year end data, what are Days Sales in Inventory? 5 2 10 = = = million million inventory COGS TO days TO DSI 73 5 365 365 = = =
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3 Q5.(5 pts) Draft a common-size income statement for a hypothetical firm using the following information: The tax rate is 33% of IBT. Net income is 1/5 th of sales. Opex is twice ROS. Costs of goods sold are 1.5x ROS. ROS = NI/sales = 0.20= 20% OPEX = 40% COGS = 30% sales 100% COGS 30% ------ Gross 70% OPEX 40% ------ IBT 30% tax 10% ------ Net Income 20% Q6.(5 pts) Draft a common-sized balance sheet for a hypothetical firm using the following information:
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This note was uploaded on 04/05/2010 for the course ENGR 111 taught by Professor King during the Winter '09 term at UCLA.

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Engr 111 Midterm Exam Winter 09_Version B_SOLUTIONS - UCLA...

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